Summary
Adobe's fiscal 2014 first quarter showed the cost of its subscription transition. Revenue was $1.00 billion, down 0.8% from the prior-year quarter. Gross profit was $851.61 million, flat versus the prior-year quarter, and gross margin rose to 85.2% from 84.5%. Operating income fell to $78.75 million, down 19.8%, and operating margin slipped to 7.9% from 9.7%. Net income dropped to $47.05 million, down 27.8%, while diluted EPS was $0.09, down $0.04. The company said the decline was primarily due to its revenue model becoming more ratable.
The operational story is the Creative Cloud ramp. Adobe exited the quarter with 1.844 million paid Creative Cloud subscriptions, up 28% from 1.439 million at the end of fiscal 2013. Creative ARR reached $987.0 million, up from $801.0 million as of November 29, 2013. Document Services ARR was $164.0 million, up from $63.0 million at the end of the first quarter of fiscal 2013. Total Digital Media ARR hit $1.15 billion, up from $300.0 million at the end of the first quarter of fiscal 2013, and increased by $207.0 million, or 22%, from $944.0 million as of November 29, 2013. Management noted that subscription and ETLA revenue exceeded perpetual license revenue for creative professional products for the first time. The company also removed general availability of CS6 on a perpetual licensing basis from legacy shrinkwrap and volume licensing channels, though it will still offer CS6 through Adobe.com and in certain markets. The company said it continues to expect the shift to Creative Cloud to drive higher long-term revenue growth through an expansion of its customer base by acquiring new users through a lower cost of entry and delivery of additional features and value, as well as keeping existing customers current on its latest release.
Cash generation and the balance sheet reflect the transition. Operating cash flow was $251.67 million, down 21.8% from the prior-year quarter. Capital expenditures were $29.39 million, down 51.2%. Current deferred revenue was $831.08 million, up 28.7% from the prior-year quarter. The MD&A attributed lower operating cash flow to lower net income and changes in trade receivables. The company also said it expects perpetual revenue for CS6 to sequentially decline, and in the second half of fiscal 2014 it expects revenue from perpetual licensing of its creative professional products to be immaterial. The company said it continues to expect the shift to Creative Cloud to drive higher long-term revenue growth through an expansion of its customer base and keeping existing customers current. The company said its subscription revenue is comprised primarily of fees it charges for its subscription and hosted service offerings including certain of its Adobe Marketing Cloud services and Creative Cloud.
Guidance context and risks. Adobe expects subscription revenue to continue increasing as a share of total revenue. It also warned that continued adoption of its managed services offering for AEM may impact overall Adobe Marketing Cloud reported revenue growth in the near term. Foreign currency was a headwind, particularly the weakening Japanese Yen against the U.S. Dollar. The company repurchased about 4.5 million shares at an average price of $58.27 during the quarter, and after the quarter it entered a $150.0 million structured repurchase agreement, leaving $450.0 million under its current authority. It also has $1.5 billion in senior notes outstanding, including $600.0 million due in 2015 and $900.0 million due in 2020. The company said its Digital Media segment revenue declined as Creative Cloud adoption increased and CS6 perpetual revenue fell, while Digital Marketing revenue grew, helped by AEM and the Neolane acquisition. The company said it expects continued adoption of its managed services offering for AEM, which will increasingly migrate AEM revenue in the Digital Marketing segment to be recurring. The company said it believes its existing cash and cash equivalents, short-term investments and cash generated from operations will be sufficient to meet its working capital and operating resource expenditure requirements for the next twelve months. It also said it was in compliance with all of its covenants as of February 28, 2014 and does not anticipate paying any cash dividends in the foreseeable future.
Forecast
Reported figures
GAAP, from SEC filings| Metric | Q1 FY2014 | Q4 FY2013 | QoQ | Q1 FY2013 | YoY |
|---|---|---|---|---|---|
| Revenue | $1.00B | $1.04B | -4.0% | $1.01B | -0.8% |
| Gross profit | $851.6M | $894.2M | -4.8% | $851.2M | +0.0% |
| Gross margin | 85.2% | 85.8% | -0.7 pp | 84.5% | +0.7 pp |
| Sales & marketing | $410.1M | $431.5M | -5.0% | $398.0M | +3.0% |
| General & administrative | $139.0M | $138.4M | +0.5% | $132.9M | +4.6% |
| Total operating expenses | $772.9M | $791.3M | -2.3% | $753.0M | +2.6% |
| Operating income (loss) | $78.7M | $102.8M | -23.4% | $98.2M | -19.8% |
| Operating margin | 7.9% | 9.9% | -2.0 pp | 9.8% | -1.9 pp |
| Net income (loss) | $47.0M | $65.3M | -28.0% | $65.1M | -27.8% |
| Net margin | 4.7% | 6.3% | -1.6 pp | 6.5% | -1.8 pp |
| Diluted EPS | $0.09 | $0.13 | -$0.04 | $0.13 | -$0.04 |
Risks
Adobe's shift from perpetual Creative Suite licenses to Creative Cloud subscriptions is expected to reduce revenues over the short term and may reduce them over the long term. The filing notes removal of general availability of CS6 on a perpetual licensing basis from legacy shrinkwrap and volume licensing channels, and MD&A says perpetual revenue for CS6 is expected to sequentially decline and be immaterial in the second half of fiscal 2014.
Subscription offerings create timing risk because a portion of subscription revenue each quarter comes from recognition of deferred revenue from prior agreements, so a decline in new or renewed subscriptions may not be immediately reflected in reported results. Deferred revenue current portion was $831.08M in FY2014 Q1, up 28.7% vs prior-year quarter, and total deferred revenue was $881.1M as of Feb 28, 2014, up 6% from Nov 29, 2013.
Adobe may be unable to predict subscription renewal or upgrade rates, and Creative Cloud individual agreements are generally month-to-month or one year, ETLAs are generally three years, and customers have no obligation to renew. MD&A reports 1.844 million paid Creative Cloud subscriptions exiting FY2014 Q1, up 28% from 1.439 million at the end of fiscal 2013, and Creative ARR of $987.0M, up from $801.0M as of Nov 29, 2013.
Longer than expected sales and implementation cycles and deferral of revenue from ETLAs and multiple-element arrangements can affect revenue. MD&A says a higher percentage of Acrobat agreements were ETLAs in FY2014 Q1, causing more revenue to be recognized over time and a decline in Acrobat revenue, and that AEM managed services adoption may impact Adobe Marketing Cloud reported revenue growth in the near term.
Markets are characterized by intense competition, evolving standards, disruptive technology, price sensitivity, and frequent new product introductions, including lower-cost or free alternatives. Digital application marketplaces often have exclusive distribution for certain platforms, and consolidation among competitors may increase competitive pressures.
Uncertainty about economic and political conditions could cause customers to delay or reduce technology purchases, longer sales cycles, and slower adoption. MD&A reports APAC revenue declined 22% in FY2014 Q1 vs prior-year quarter, due in part to weakening Japanese Yen, and foreign currency reduced total revenue by $10.9M, partially offset by $2.8M hedging impact.
Changes in tax rules and regulations may adversely affect Adobe's effective tax rate. MD&A reports the effective tax rate increased six percentage points to 28% in FY2014 Q1 from 22% in the prior-year quarter, primarily due to expiration of the federal R&D tax credit in December 2013 and weaker forecasted international profits for fiscal 2014.
Security vulnerabilities in products and systems could lead to reduced revenues or liability. The filing states certain parties have in the past breached data-security systems and misused systems and software to access end users' authentication and payment information, and hackers have accessed certain source code in the past and may obtain access in the future.
Increasing regulatory focus on privacy and expanding laws could impact Adobe's new business models and expose it to increased liability. New business models are more highly regulated, including for privacy and data security, and are expanding in countries with more stringent data protection laws than those in the U.S.
SaaS KPIs
All quarters →Creative ARR
Total Digital Media ARR
Paid Creative Cloud Subscriptions
Document Services ARR
Summary, forecast, risks and KPIs are extracted from ADOBE INC.'s SEC filings for Q1 FY2014 (10-Q / 10-K and the 8-K earnings release); GAAP figures in the summary are checked against the reported XBRL data. They can contain errors; the filings are authoritative. Processed Oct 8, 2026.